ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Bubble of ‘Benign’ Inflation

Inflation management should not be a legislative mandate, but a holistic development goal.

 

The 2019 general elections were perhaps the first of a kind in India that did not have “inflation” amongst the electoral agenda. And rightly so, because over the past five years inflation, especially the headline inflation rate, in this country has been bridled. From 2014 till April 2018, the year-on-year inflation rate—estimated as the rate of change of the consumer price index (CPI)—declined steeply from 6.65% to 2.42%. But what potentially has given legitimacy to the numerical value of these estimates is the concept of the “permissible” range of 2%–6% of inflation, as provided by the inflation targeting framework of the Reserve Bank of India (RBI).

The macroeconomic (policy) discourse on the relationship between inflation and economic growth recognises the significance of a “threshold level” of inflation. Though there is a consensus that inflation above the threshold limit hurts economic growth, empirical evidences of the effect of low inflation rate on growth are mixed yet predominated by instances of either positive or insignificant consequences. Given such evidences alongside the RBI’s mandated inflation range, the current hike in CPI-based inflation in India, even if to its five-month high of 2.92% in April 2019, can still be considered “benign” in the RBI’s parlance. So much so that the RBI could slash down its policy rate to 5.75% from 6% in a quick succession within three months. The objective is to stimulate private investment and consumption expenditure so that the gross domestic product (GDP) growth can be revived from its current low of 5.8% to reach the 2019–20 target of 7%, notwithstanding the consequences of such circumspect tactics of economic growth on wider socio-economic objectives.

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Updated On : 19th Jun, 2019

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